Examining Real Estate Taxes and Operating Costs – Assess Your Commercial Lease

Editor’s note: this is part of an NRTA series regarding “hidden” lease costs. The introduction can be found here.

In this piece, we’re going to break down major lease fees into three areas: real estate taxes, insurance costs, and utilities.

Real Estate Taxes

With the pandemic massively impacting the budget of every state, city, and county, you should be prepared for your taxes to raise as well. There are a couple of things to keep in mind as you look ahead.

A photo of white graphing paper filled with cursive words and numbers.

For those who have stores located on their own land, you need to keep an eye on the assessed value levied against your real estate. Take an objective look at that value to determine if it’s in line with the market value of the land. This is something that will vary depending on location and may require the help of a professional. You can turn to a tax accounting firm, tax recovery firm, or law firm that specializes in real estate assessment. Regardless, you should definitely consider a (cost-free) review of your portfolio.

Whether you pay for your own land or pay a pro rata share of the greater tax bill, you should review your lease to understand the definition of real estate taxes. Here are a few questions to consider when looking at the lease and the real estate tax billing:

  1. What items outside of taxes on real property are included and are excluded?
  2. Are there any special assessments on the billing and in your lease?
  3. Has the assessed value changed, and if so, why? What rights do you have as a tenant in appealing the assessment?
  4. Is the landlord passing through additional costs for a review of the assessment, and if so, are they permitted to do so?

These questions will allow you to capture some of the more common issues found in typical real estate billings.

Insurance Costs

There are many issues related to insurance that can be addressed in any cost containment discussion. But what can you focus on to get a quick comfort level with an insurance billing? One way to do this is to look at the rate per square foot in this past year’s billing versus the prior billing. If you see a significant increase, start asking questions.

You should also understand the area that is covered by the landlord’s billing and compare that against the definition of pro rata share of insurance in your lease. Is the landlord under-allocating the cost? To determine that, they should be including every tenant or storeroom (even if vacant). This is an area that you should review for all occupancy billings including real estate taxes, insurance, common area maintenance, utilities, and other shared expenses.

If your lease allows, require the landlord to provide proof of payment to the insurance carrier and proof of coverage in the form of an insurance certificate. When you request an insurance certificate, you will want to make sure that not only was the landlord covered for the period they billed to you but also ensure that you continue to be covered by requesting a current insurance certificate. This is especially important for locations where you may have a history of incidents and claims against the landlord, which could be by third parties or customers.

Utilities and Shared Services

Whether included in common area maintenance (see this post for more details on CAM) or billed separately, you should pay attention to utility billings and shared services such as trash removal. Not only is every lease different, but the mix of tenants, services required, and services provided will vary from site to site as well. You may find that the billing methodology is not clearly defined in the lease, if at all. References in the lease may be vague enough to leave it up to interpretation or the center may be so old that the actual design does not match how it is defined in your lease today.

In the cases where your lease does not provide a clear definition of your pro rata share for these types of billings, the first thing to look for is consistency. Not only do you want to see consistency from year to year, but you also want to see consistency in how the landlord is billing every tenant. For example, if you are paying for a shared electric service, you do not want to see other tenants pulled out of the denominator and billed a fixed fee if there is no valid reason for doing so.

You also want to look at what is fair to all of the tenants. Remember that these are shared services, so a pro rata share calculator based on square footage may not be the best fit. For example, a restaurant is going to use more water than the average retailer. A full service grocery store or supermarket is going to use more electricity and generate more waste than other retailers. You should be looking for equity in your lease or your deal with the landlord, so you don’t necessarily need to care about the deal that the landlord has with the other tenants. You just have to make sure that the landlord is not penalizing you for their deal with the other tenants.